The Top 5 Lodging Tax Mistakes You Don't Know You're Making
- Nov 15, 2016 | MyLodgeTax
Not being licensed to rent your property
Many people believe (erroneously) that if it’s their property, they can rent it out if they want to or not. Not true! Properties are subject to zoning laws and your property may be in an area that doesn’t allow short-term rentals. And even if it is permissible, you’re effectively operating a hotel business in the eyes of the tax authorities and must collect lodging tax from your renters. This means that you need to first register with the tax authorities and obtain any required business licenses or tax collection permits in order to rent your property legally and charge tax.
Collecting tax from guests but not knowing where, how, and when to pay it
You may be aware of the need to charge & collect lodging tax from your renters and are already doing so, but knowing when to file and to what jurisdiction is another matter. For example, if the total lodging tax rate on your property is 9%, that could be made up of 4.1% to the city, 3.2% to the county, and 1.7% to the state. And the filing periods for each can differ, too – potentially monthly to the city, quarterly to the county, and annually to the state. Keeping all of the tax amounts and payment timing sorted out is a challenge for even the most experienced property owners! And the government really doesn’t like it if you’re collecting tax – which is their money – but not paying it to them. This can be met with criminal charges. Gulp.
Assuming the tax is paid at the end of the year or paid with income taxes
Related to the previous point, lodging taxes are not income tax. We’ve seen some property owners simply add their rental revenue to their annual income tax return. This is not correct! Although you must still account for income from your property rental on your personal or business income tax return, lodging taxes are completely separate from income tax. The key difference is that lodging tax is a form of sales tax on rental transactions between you and your renters which must be treated outside of income tax. The tax is actually being paid by your renters – you are really acting as an intermediary between your renters and the tax authorities in collecting and remitting these taxes.
Not collecting and remitting any taxes — not knowing or ignoring the requirements
Not collecting any taxes or your short-term rentals is a big no-no too in the eyes of the tax authorities. And here’s the really dangerous part. If you haven’t been collecting and remitting tax payments, when the authorities find out, you are still responsible for making the tax payments even though you haven’t been charging your guests lodging tax. In other words, your rental revenues just got reduced by the percentage you should have otherwise been charging and collecting on top of your rental rate. Oh, and to add insult to injury, there will likely be penalties and interest on top. Ouch!!
Charging the wrong tax rate
Ok, so you’re licensed and renting your property legally and collecting & remitting lodging tax. Kudos to you! But determining the right total tax rate to charge can also be a significant challenge. As mentioned before, your property is probably governed by three different tax authorities – city, county, and state. But there can be more. In popular tourist areas, there may be “special tax jurisdictions” that add yet another layer. And just for fun, each may have differing rules on applying those individual rates depending on length of stay, type of renter, etc. And then the rates can change. Fortunately, if you have questions about the correct lodging tax rate you should charge, we have a handy lodging tax rate lookup tool here that can save you the trouble.
The 6th mistake implied in this list is trying to figure out your lodging tax requirements and filing returns and remitting tax payments yourself! Lodging taxes can be expensive to get wrong, but they can be easy to get right with MyLodgeTax. If you’d rather stay out of trouble and be confident that your taxes are done right, we can help.